This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

5 Stocks With Safe, High Dividend Yields

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- An interesting aspect of Joel Greenblatt's Magic Formula Investing (MFI) strategy is that its precepts can be applied to a variety of other stock strategies and focuses. For example, if you like to invest in small caps, MFI can be used to find good, undervalued businesses in a sector that is under-followed by professional equity analysts. If you are looking to invest in foreign markets, MFI can be applied to stocks in foreign exchanges, and so forth.

We can also go the other way, and apply additional criteria to stocks in the official MFI universe. In theory, doing this starts us with a list of good, undervalued companies, weeding out a lot of junk from the beginning. This article will focus on combing through the three screens covered by MagicDiligence (top 50 over $50 million and $1 billion, top 30 over $3 billion), looking for MFI stocks with relatively safe dividend yields above 3.5%, providing ongoing income for investors:

1. Altria Group (MO)

Forward Dividend Yield: 5.7%

Free Cash Flow Payout Ratio: 115%

Consecutive Years of Dividend Hikes: 43

Magic Formula Earnings Yield: 9.1%

Magic Formula Return on Capital: 44.3%

Altria Group is the largest tobacco company in the U.S., producing the No. 1 brand of cigarette (Marlboro), and the No. 1 brand of smokeless tobacco (Copenhagen).

Competitive dynamics are strong, as oppressive government regulation in the U.S. shuts out new competitors and hurts discount labels more than premium brands, and the firm produces copious amounts of free cash flow. Altria is a "dividend aristocrat," raising the dividend for 43 consecutive years. Recently, though, dividend payments have begun to outstrip free cash flow, so this is something to watch. Competitors Reynolds American (RAI) and Lorillard (LO) are also Magic Formula stocks and also interesting dividend investments.

2. Eli Lilly (LLY)

Forward Dividend Yield: 5.3%

Free Cash Flow Payout Ratio: 36%

Consecutive Years of Dividend Hikes: 42 before being broken in 2010

Magic Formula Earnings Yield: 16.0%

Magic Formula Return on Capital: 54.1%

One of the largest pharmaceutical makers in the world, with products like Cymbalta for depression and antipsychotic Zyprexa. The payout ratio is modest and Lilly has a stellar dividend record. Some concerns are a high debt load after purchasing ImClone in 2008 and a large patent cliff in the next 2 years (over 40% of sales). A decent pipeline of new drugs and cost cutting will be key in maintaining and raising the dividend, and the payout ratio is safe for now. At a 16% earnings yield, there is also significant capital appreciation potential if the R&D pipeline can deliver. Like tobacco, branded pharmaceuticals have an outstanding long-term investment record.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,122.01 +15.31 0.09%
S&P 500 2,000.12 +0.10 0.00%
NASDAQ 4,569.6210 -1.0160 -0.02%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs